If you’re in the dark about your holdings, get professional help

RichardEisenberg

There’s widespread agreement that Americans need to be saving more for retirement, but a new (albeit small) survey suggests they also need to be saving more intelligently.

Hearts & Wallets, a financial services market research firm, just held focus groups with 72 men and women age 40 to 64 with at least $250,000 in investible assets and found that very few of them knew which investment products were in their retirement portfolio or why.

Problem is, Brown noted, “if you don’t know what your investments are, you don’t know your exposure to the stock market or interest rates.” Then, if you’ve unwittingly put all your chips on stocks and retire as the market collapses, you could be in serious financial trouble.

Brown’s study echoes one from benefits consultant Towers Watson in 2012 where only one in five large companies said they believed their employees generally made informed decisions about retirement savings.

Ignoring a key retirement decision

The Hearts & Wallets study also discovered that very few focus group investors had given serious thought to how they’ll go from accumulating assets for retirement to turning that portfolio into income when they’re in retirement.

Most have “no idea,” the Hearts & Wallets report “Life After Work and Fear of the Unknown” noted. “You’d think they’d plan more for it,” said Brown.

I asked Brown why people nearing retirement don’t focus on what financial advisers call the “decumulation” phase. “A lot of it is inertia,” he said. “Planning your retirement income means making some tough decisions. So it’s like going to the dentist; they put it off until they have to.”

Another reason: Many people don’t know when they’ll retire.

Why target date funds are a turnoff

Brown said the retirement date mystery also explains why so many in the focus groups won’t invest in target date funds (which handle asset allocation decisions for them pegged to their intended retirement date) through their 401(k) and other employer-sponsored retirement plans.

They’re skittish of committing to, say, a Target Date 2025 Fund which would likely tilt heavily toward bonds and cash when 2025 rolls around. Said Brown: “They say: ‘I don’t know how long I’ll live after the target fund’s date. I could live to 105. So I don’t want my money to go to cash at the target fund’s date.’”

More evidence that flying blind is, sadly, a popular approach to retirement investing: Only 19% of employees whose 401(k)s provide investment advice use this benefit, according to Plan Sponsor Council of America, a nonprofit serving defined contribution plan sponsors.

Better returns with professional help

Yet survey after survey shows that 401(k) investors taking advantage of professional help do better than those who don’t.

Last month, a study of 401(k) investing behavior of 723,000 workers at 14 big U.S. employers found that, on average, employees who took advantage of professional expertise by investing in managed accounts or target date funds or by taking online advice had median annual returns 3.32% higher (net of fees) than those managing their own portfolios. The independent investment advisory firm Financial Engines and benefits consultant Aon Hewitt conducted the study.

If you use an investment company to manage your 401(k) savings, you’ll pay a fee, of course — typically 0.25% to 1%. That’s a stopper for many people.

Jack VanDerhei, research director of the Employee Benefit Research Institute, told The Wall Street Journal that “the underlying reason for those who didn’t take [the investment advice offered through their plan] was without a doubt that they didn’t want to pay the cost.”

The inconvenient truth for 401(k) investors

Others deny themselves the 401(k) investment advice because they deem the service from their plan provider inconvenient.

“We hear excuses all the time like: ‘Oh yeah, my employer has someone but it’s 20 minutes away and I don’t have the time,’” said Brown.

But I believe getting advice from a professional — even if you then choose not to take it — or investing your 401(k) in a managed account or target fund run by a pro is generally worth the cost.

And I’m not alone.

Saving you from yourself

In a recent MarketWatch.com article, “Retirement Investing: Don’t Go It Alone,” Robert Powell quoted Dan Heath (co-author of Decisive) saying that advisers can help investors avoid bad decisions by providing a buffer to their emotional reactions to swings in the markets.

If your employer doesn’t offer investment advice from a firm like Financial Engines or Morningstar, you can hire a company like JemStep, Personal Capital or Smart401k.com to advise you on your 401(k).

So: hire a financial planner or use a service offered by your employer if that’s possible or sign up with a company that’ll X-ray your 401(k). Or perhaps invest in a target date fund that’ll adjust your asset allocation for you and then transfer out of that fund as retirement nears if you like.

Retirement investing isn’t a sport for amateurs.

Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue and Assistant Managing Editor for the site. Follow him on Twitter @richeis315.

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